Mutual Fund News

Weak performance plagues AIC

Burlington, Ont.-based fund manager and its billionaire owner are said to be at a crossroads, KEITH DAMSELL writes

By KEITH DAMSELL

Monday, January 31, 2005

AIC Ltd. is at a crossroads -- but is it a new beginning or the beginning of the end?

There's much debate across the fund industry about the future of the fund manager and its billionaire proprietor Michael Lee-Chin. After a meteoric rise in the late 1990s that saw the firm's assets under management swell to $15.4-billion, fortunes have sunk like a stone to less than $11-billion today. Weak performance is a chronic problem, with one-third of the company's 52 mutual funds receiving a dismal one-star rating from Morningstar Canada.

Two camps are emerging: Some advisers and analysts believe the worst may be over and are taking a tentative wait and see approach. Industry rivals, however, believe there is little Mr. Lee-Chin can do to slow his firm's downward spiral.

"It's not a compelling story to say 'I think you should buy this fund because it has terrible short-term performance,' " said Michael Morrow, a Thunder Bay, Ont., financial adviser. Since December, his AIC wholesaler has met with him twice to talk about the merits of the company's funds.

"They are trying really hard, but it's kind of hard when you are working from such a negative environment," Mr. Morrow said.

AIC has made a series of moves over the past year to end redemptions. New fund managers have been brought on to improve performance, the fee structure is under review and a new marketing team, led by industry veteran David Whyte, has been hired to sell the AIC story.

"The changes can't hurt and can only help," said Morningstar analyst Mark Chow.

And for the first time in a long time, the media-shy Mr. Lee-Chin is speaking to the press.

In a recent interview, the charismatic financier said he has no intention of shifting the company's value management style or selling the firm to the highest bidder. He urges unit holders to be patient. An aging population means undervalued wealth management stocks -- a core holding in some of AIC's largest funds -- will make strong gains over time, he said.

"History is on our side," he said in an interview at AIC's grand head office in Burlington, Ont., resplendent with original paintings, ornate sculptures and French tapestries.

"We need to get Canadians to be better investors. They have to be prepared to think much longer-term time frame . . . and be a lot more patient.

"They have to accept that volatility is a natural part of investing. So hang on," Mr. Lee-Chin said.

But critics -- including industry rivals that closely watch AIC's fund flows -- argue the firm has made some critical mistakes. First, the fund business has matured and many of AIC's competitors have expanded their product offerings and investment styles to better meet the needs of advisers. Rightly or wrongly, AIC is widely regarded as a niche financial services fund manager rather than a provider of core holdings.

And second, little has been done in recent years to halt weak fund performance while new investment dollars have been scarce. Heavy redemptions have forced AIC to unload some of its best names to pay out investors and keep adequate cash on hand. Indeed, since 2000, the AIC Advantage II Fund has reduced its exposure to star Toronto-Dominion Bank, while boosting its weighting in a handful of dogs, including AGF Management Ltd., Amvescap PLC and MDS Inc. The equity fund has shrunk to $1.4-billion, down 70 per cent from $4.4-billion in 1998.

And as rivals AGF and Fidelity Investments Canada Ltd. can attest, it's extremely difficult to reverse momentum when investors start heading for the exits. It's estimated a whopping 40 per cent of AIC's assets under management come off their DSC schedule in 2005, the deferred sales charge that investors pay when they bail from a mutual fund.

"We got here today by being steadfast," Mr. Lee-Chin said. "I'd rather we be in favour with advisers every day but that is not life. My responsibility is to be unwavering in terms of our philosophy because eventually, if we do what is right, we will be vindicated."

The word is that Mr. Mortimer will be joining Capital Group Companies Inc., one of the fastest-growing -- and most secretive -- asset managers in the United States. Mr. Mortimer is best known in this country for his stewardship of the AIM Canadian First Class Fund. The $1-billion fund has been a consistent top performer in its class.

The Mutual Fund Dealers Association has announced its first disciplinary action against a salesperson.

Robert Roy Parkinson is accused of soliciting and accepting $314,000 from clients but failing to account for the money, the MFDA claims. In 2000 through 2002, the funds were allegedly invested in Glengarry Investments, a numbered company whose president, secretary, treasurer and director is . . . Mr. Parkinson! In February last year, the fund salesman failed to show up for work at IPC Investment Corp. and his whereabouts today are unknown, the MFDA claims. The hearing is scheduled for Feb. 23 in Toronto.

AGF Management Ltd. is looking for buyers for its back-office unit Unisen Inc., several sources report.

The Mississauga company provides administrative services to about 170 mutual fund companies and is no longer considered an AGF core holding.

If sold, Unisen could mean a one-time special dividend for AGF shareholders.

But analysts are quick to note that any divestment plans do not address the key issue of ending redemptions in AGF's $23-billion retail fund business.

AGF had no comment on Unisen's fate. In September last year, however, BlakeGoldring, AGF's president and chief executive officer, told the investment community "we are going to be seeing if there are other ways we might be able to extract more shareholder value from Unisen as we move on."